why such a leak?

[olivegreen]

http://www.globalresearch.ca/index.p...t=va&aid=13826

Global Research, June 2, 2009
Economic Policy Journal

The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.

The Federal Reserve leaked to CNBC's Steve Liesman on Friday that they weren't targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren't targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It's always been, "no." Now it's maybe.

What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It's a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.

Translation, the Fed doesn't know what is going on, but they are really scared.

etc... etc... etc...

[GRG55]

Re: why such a leak?

http://www.globalresearch.ca/index.p...t=va&aid=13826

Global Research, June 2, 2009
Economic Policy Journal

The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.

The Federal Reserve leaked to CNBC's Steve Liesman on Friday that they weren't targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren't targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It's always been, "no." Now it's maybe.

What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It's a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.

Translation, the Fed doesn't know what is going on, but they are really scared.

etc... etc... etc...

This ranks right up there with other Fed pronouncements like "subprime is contained [Bernanke]" and "no national housing bubble [Greenspan]"

From the Fed playbook:

Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here


...So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.⁹ There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.¹⁰ Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable.

At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.¹¹ For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios...

[jk]

Re: why such a leak?

i wrote about a coming "reverse conundrum" in 2007:

i know that historically when the economy slows and the fed cuts short rates, long rates have followed. however, i think we are likely to see a "reverse conundrum." you recall that greenspan labelled as "a conundrum" the fact that long rates stayed low even as the fed hiked short rates. my own reading of this is that long rates were held down by the recycling of the trade deficit into treasuries. higher short rates tended to support the dollar. the dollar index slowly declined, but that index is 50% euro, and the dollar held up much better against the yen and yuan, the currencies of the main dollar recyclers. at the same time the yen carry trade remained profitable, and could be made even more profitable by creeping out a bit on yield curve. this latter trade remained profitable as long as longer dated instruments didn't sell off, i.e. as long as the conundrum persisted. so the conundrum had momentum - as long as it persisted, it encouraged a duration carry trade which tended to maintain the conundrum. as u.s. consumption slows, so will imports. this is a double whammy: foreign exporters will not have so many dollars to recycle, as the u.s. market itself becomes less attractive and less worth pursuing via nation state level vendor financing. during the recent credit market scare the yield curve steepened sharply, via short rates dropping. long rates didn't drop, and even rose a bit.

so in the "gloom-and-doom scenario," when the fed drops rates to 1.5% on fed funds, what will the dollar do? unless there is a globally coordinated rate drop, the dollar has to drop sharply. of course, the boj can't join the party even if there is such coordination- they can't drop below zero. so there is market turmoil, equities are postulated [by byrne] to drop about 20%, the yen carry trade looks a lot less attractive, and - in this recession scenario - both the boj and pboc have many fewer dollars to recycle. but this is a recession scenario! what happens to the federal deficit? borrowing needs increase even as fewer dollars are need to support a shrinking trade deficit. i think all this adds up to a reverse conundrum: long rates will hold or even rise as the fed drops the fed-funds rate sharply. so if you want to hedge the "gloom-and-doom" scenario, don't do it with long bonds. just hold cash or perhaps hold zeros with a duration no longer than about 5 years.

http://www.itulip.com/forums/showthr...erse+conundrum